Sun March 18, 2012

First-Time Homebuyers Carry Financial Baggage

Though the Rhodes family was able to take advantage of low interest rates and affordable housing prices, there can still be plenty of obstacles for aspiring homeowners, particularly for people trying to buy their first home. According to a Federal Reserve report, the number of 29- to 34-year-olds who got a first-time mortgage between 2009 and 2011 is nearly half of what it was a decade ago. To learn more, we spoke with Robert Shiller. He's a professor of economics at Yale University. His analysis of housing prices, developed with Wellesley professor Karl Case, is published as the S&P Case-Shiller Home Price Indices. We asked him to explain why more potential first-time homeowners are finding themselves on the sidelines.

ROBERT SHILLER: Well, it's partly cultural and it's partly financial. Part of the culture of buying a home has diminished. The idea that you wanted to get out - kind of an American idea - you wanted to get out and be independent and become a property owner is just not as fashionable now. And people are not so sure about housing as an investment. It used to be - not long ago - that young people wanted to get on the property ladder, as it's sometimes called, which they thought just goes up and up and up. And they had been worried about being priced out of the market, and so they hurried to get in. Now, that feeling has gone. And staying home with mom and dad seems perfectly all right now.

MARTIN: Wow. Times have changed. You know, I'm wondering how student debt plays into this, especially with this demographic. How do you see this playing into the housing market right now?

SHILLER: Right. The student loans, that's a loan that you can't get out of, by the way, by declaring bankruptcy. So, it kind of weighs on you. You know, recent data show that student loans have increased markedly over the last decade. In fact, the total amount of student loans is up to something on the order of a trillion dollars - huge. That is particularly focused on younger people, the people who would be buying a home for the first time. Now, if these people look forward to higher income as a result of having gotten a college education, they might perfectly well not feel saddled by the debt. They might feel ready to go and make an investment in a house, but they have an immediate problem that they have to pay this debt right now. Makes it harder to get a mortgage and makes it less likely that they'll actually buy a house.

MARTIN: I imagine this also have a multiplying effect on people who are trying to sell their homes. If there aren't these younger homeowners, first-time buyers out there looking for properties, people can't sell them. They can't offload their properties. Is that right?

SHILLER: That's right. I think that there's a lot of, what we call, shadow inventory of homeowners who might like to exit the market but they don't want to do it now because it's a bad time. They're holding on. You know, the funny thing is, you know, we're talking in kind of negative terms here. There's a lot of optimistic indicators that suggest that we're coming out of this recession and times will be better soon. But they haven't gotten there yet. The indexes that I work with, Karl Case and Standard & Poor's, to produce have been falling. They've been falling for four months in a row now, and part of a more general trend of falling home prices going on for years. So, it doesn't seem to look good and I think that part of the reason it doesn't look good is that there aren't the buyers. You know, the financing is hard and the inclination to go out on a limb to buy a house is just not there.

MARTIN: What do you think are some ways to get more first-time homebuyers into the market? Is it as simple as giving out a tax credit? How complicated could this be?

SHILLER: Well, that's an interesting thing that you say about tax credit. Right now, we have a mortgage interest deduction. You can deduct the interest you paid to buy the house. That does encourage home ownership, 'cause it's a tax break. The problem is that it tends to favor higher-income people, not the lower-income people that we are most concerned about getting into housing. That's because higher-income people have higher marginal tax rates. So, a deduction matters more for them. And higher-income people are much more likely to itemize on their tax returns. So, I think that one step is to switch from a mortgage deduction to a mortgage tax credit that's equally valuable to people of all income levels.

MARTIN: Robert Shiller is a professor of economics at Yale University. He spoke with us from the studios there in New Haven, Connecticut. Professor Shiller, thanks so much. We appreciate it.